Needs vs. wants: building a simple budget
A budget is just a plan for your money before you spend it. Instead of wondering where it all went at the end of the month, you decide ahead of time where it's going.
The first skill that makes a budget work is telling the difference between what you need and what you want.
Needs vs. wants
- Needs are things you have to pay for to live, stay safe, or keep your commitments: food, getting to school or work, basic clothes, and any bills you've agreed to cover.
- Wants are things that make life more fun or comfortable but that you could skip: new games, takeout, concert tickets, the latest sneakers.
Wants aren't bad. Spending on things you enjoy is part of the point of having money. The goal is to choose them on purpose, after your needs and savings are covered.
The gray areas
Lots of things are part need, part want. Food is a need; eating out three times a week is a want. A phone might be a need for school and safety; the newest model is a want. When you're not sure, ask: "What's the cheapest version that would still do the job?" That part is the need. Everything above it is a want.
Build a budget in five steps
- 1. Know what comes in. Add up your money for the month: allowance, a part-time job, babysitting, gifts.
- 2. Track what goes out. For one week, write down everything you spend, even small things. Small purchases add up fastest.
- 3. Sort it. Mark each expense as a need or a want.
- 4. Pay yourself first. Move money into savings as soon as you get paid, before you spend on wants. Many people aim for about 20%.
- 5. Check and adjust. At the end of the month, compare your plan with what really happened, and change next month's plan.
Try it: need or want?
Sort each item. There's a best answer for each, but notice where the gray areas show up.